Much Ado About Nothing? New State Rules for “Pay-As-You-Drive” Insurance (Updated at 4:07 P.M. Below)

10_19_09_meter.jpgI’m guessing his car insurance would be higher than mine. Photo: Clubjuggler/Flickr

Last week, State Insurance Commissioner Steve Poizner announced that his commission adopted new rules allowing and encouraging auto insurance companies to create "pay as you drive" (PAYD) insurance policies. PAYD policies, which charge drivers per mile driven for their insurance, provide another financial incentive for drivers to reduce their vehicle miles traveled. The new rules can be read here.

The state has received a spate of good press for the new rules, most of which uncritically tell readers that they can expect the new policies to be offered as soon as the end of this calendar year.

One might think that a state with a green reputation such as California would be a leader in bringing PAYD policies to its car drivers. However, the new rules have come under fire from environmentalists who say the rules don’t go far enough to bring about the changes that California’s more green-minded drivers need.

Justin Horner, a policy analyst for the National Resources Defense Council, said in a release today, "Our auto insurance policies are sorely behind the times. No one should be fooled. The new regulations proposed today cannot be characterized as green. They are nowhere close to what is needed to help the environment or reduce global warming pollution."

Horner explains further on the NRDC’s Switchboard that California’s new rules barely get the state half-way where it needs to be:

To really break it down to it’s fundamentals, PAYD needs two basic elements: 1) a method to record and verify a driver’s mileage; and 2) a clear price per mile…

…The problem is, California’s new regs only get us half-way there: they permit your insurer to verify your mileage. They do nothing to set a clear price. They neither require a PAYD price structure nor even offer guidance on how to make one. Setting up mileage verification programs is not the same as offering PAYD insurance…

…Instead of requiring insurance companies to offer PAYD insurance policies, the final regulations appear to merely allow insurers to offer a voluntary mileage verification program.

As Horner notes, without setting a clear price and requiring insurers to offer PAYD policies, the state is leaving the decisions to the whims of the insurance companies and possibly making the policies less transparent to consumers. Where is the guarantee that any of the insurers will voluntarily offer the reduces rates for drivers who try to do the right thing?

The NRDC notes that strong rules on PAYD programs could lead to a massive reduction in greenhouse gas emissions throughout the state. Unfortunately, California has chosen to be a follower rather than a leader on this issue. Thirteen other states have already included the concept in their Climate Action Plans and some insurance companies on the east coast are even offering incentives to policy holders who commute by transit.

Update 1: Darrell Ng, from the California State Department of Insurance emailed me the following comment, which I agreed to print in full:

The question comes down to one of consumer choice. We believe that given the opportunity to save significant amounts of money by driving less, many people will do so with the Pay As You Drive program. However, we do not believe that people should be forced to use Pay As You Drive. If a consumer is happy with the insurance their current insurance, it will continue to be available in the market.

(SF Streetsblog’s Matthew Roth contributed and edited this article.)

  • This is great news for those that use alternative means of transportation–hopefully. Since my bike is my primary mode of transportation, my auto is used quite infrequently–yet I’m required to maintain full-time insurance for it. I already get a pretty good rate as it currently stands because of my reduced mileage, but the post raises a good issue that “there is no guarantee that there will be a significant savings over current rates.” So what does this new rule actually do–and does it have any teeth that might tend to actually reduce insurance rates for miles driven? I suppose only time will tell; but I know that insurance companies have nasty habits of tweaking premiums and increasing shareholding profits. So I’m emailing my insurance broker to look into it right now.

  • r€nato

    I’m curious how this works. Who checks your odometer? Do insurance agents really have the time to do this (or have their staff do it)? What happens if someone accidentally transposes two digits, resulting in a much higher bill? Can you appeal your bill?

    I don’t see how this is practical, but I’m assuming others have thought this stuff through… I manage to drive roughly 7000 miles a year in a city where 20,000 miles / yr is probably normal. I would love to see this come to my state, I am not only a careful driver but I also have 1/3 the risk of other drivers since I drive 1/3 the miles!

  • r€nato

    The way of measuring it depends on the agency. The most likely way would be to have the mileage measured and recorded when your car gets it’s emissions check.

  • labradog

    What’s to prevent one from disconnecting the speedo? (Shades of high school hi-jinx!)
    Plenty of GPS units will give you your speed.

  • Thank you, Damien, for the write-up. We here at NRDC agree with Mr Ng that consumers should ultimately decide whether to go with a pay as you drive policy, which is why we recommended that the Commissioner require insurers to offer such an option to their customers. That way, it’s real consumer choice. The Commissioner’s new regs leave PAYD entirely up to insurers.

  • jjcomet

    Labradog – Disconnecting your speedo would almost certainly invalidate such a policy; in many states it’s illegal to disconnect your speedo in order to show a flase mileage reading.

  • Rob G in Chicago

    I haven’t seen anything in the article that would indicate that anything other than mileage would be used to establish the insurance premium or rates. Even within a metropolitan area, there are some areas of hiher risk than others. Even the time of day would factor into risk of accidents. Folks who live in sparcely populated rural areas often have to drive twenty miles or mor just to reach a gas station, grocery store, or laundramat, and there is really nothing that is close or conveniently located, yet the risk of having an accident while driving in those areas may be much less than driving three or four blocks in a congested urban area (even factoring in the chance of hitting various critters). I don’t see how an auto insurance premium system based only on mileage would be fair or equitable.

  • Matt

    Rob, I think where you live is still a factor in insurance costs even with this method. The way I see it, this helps even the playing field. Right now, someone who lives in a rural or suburban area, but drives far distances (including into the city) pays low rates, but someone who lives in the city and hardly drives (walks or cycles) pays high rates.

    It is more even since CA passed the law that insurance cannot use zip code as a primary factor in cost. Even though this is far from perfect, this is a good first step in rewarding people who don’t drive much with lower insurance rates.

  • Bennie F

    These pay-as-you-drive plans do not need to be mandated to force insurers to introduce them. Competition will take care of that.

    Progressive started the ball rolling and their product MyRate is now available in 16 states. According to one industry survey, a dozen insurers plan to offer pay-as-you-drive plans by the end of the year. They said their primary motive is defensive — meaning they don’t want to lose their profitable, low-mileage customers to competitors who offer these plans first.

    Watch for a number of insurers filing to offer pay-as-you-drive plans in California very soon, now that regulations permitting them are in effect.

  • It’s strange to see everyone flailing around trying to figure out how to construct a practical per-odometer mile auto insurance pricing system when that information has been available for years at the one authoritative source on this method – Go there for a clear, thorough description of the per-mile concept and its practical application undistorted by policy wonk and political pressures.

    All of the questions raised in previous comments are answered there. In addition, readers can find a fearless critique of faults in the present marketing-driven systems that in some areas force drivers to use uninsured cars. Environmental benefits are possible, but the real need is for a straightforward, transparent pricing system that ends cost-shifting from high to lower mileage cars and results in each insured car paying for the insurance protection it consumes in on the road use.

    Texas insurer MileMeter uses a genuine per-odometer mile system at


Progressive to Offer “Pay As You Drive” Insurance

  While other insurance companies belittle those who can’t or don’t drive, another — Progressive — is living up to its name by being the first major US insurer to offer a "Pay As You Drive" policy, allowing customers who drive less to pay less for coverage. As explained in a New York Times "Freakonomics" […]